The strategic partnership between Volkswagen AG and Suzuki Motor Corp. is likely to benefit the latter’s Indian subsidiary, Maruti Suzuki India Ltd, albeit in the long term. Suzuki’s Indian operations are among its most successful, especially in terms of profitability. According to segmental profit data for the six-month period from April to September, the company’s Asian operations (which comprise India, Indonesia and Pakistan) reported a profit of 25.45 billion yen (Rs1,337.72 crore). The company’s total operating profit stood at 31.84 billion yen. In terms of revenue, the Asian operations accounted for about 29% of the firm’s total revenue of 1.18 trillion yen. The share of profit of the Asian operations has risen this year, because of a sharp drop in the profitability of the domestic business in Japan this year.

This underscores the cost competitiveness of the Indian operations and the rationale for making India a hub for outsourcing small cars. The sharp jump in Maruti’s exports this year already reflects this. In the eight-month period between April and November, Maruti’s exports have risen by 126% to 91,731 units. The firm plans to increase its capacity and one of the factors that will drive the decision on how much additional capacity would be put up is the outsourcing opportunity.

Volkswagen could only enhance this opportunity, especially considering that the latter operates at a much larger scale. Of course, this will materialize only in the long term. It’s no wonder that the Maruti stock didn’t do much after the news of the partnership, although it did manage to close around 2.5% higher on Wednesday, when the markets fell.

From Volkswagen’s perspective, the partnership will give it the best possible footprint in India. It will become the single largest shareholder in Suzuki, which enjoys at least 50% share of the Indian market. While the launch of its small car, Polo, may enable it to increase its share in the Indian market, its partnership with Suzuki will immediately increase its presence in India. Currently, 90% of its volumes in the Asia-Pacific region comes from the Chinese market, and India accounts for only 1.2%. Apart from the Indian market, it will also get a presence in Indonesia and Pakistan thanks to the partnership.

Volkswagen also brings with it strengths in the area of diesel engines, luxury cars and a strong presence in the European market. Suzuki and its affiliates will benefit from this expertise. Besides, a large chunk of the money received by Suzuki will be invested in research and development, and Maruti is likely to benefit from the trickle-down benefits.